The US political climate continued to keep traders wary as debt ceiling and spending cuts debates look set to see Washington in a standoff again. But before that, the fourth quarter earnings season kicks off this week with the aluminium major Alcoa starting the proceedings.

The eurozone is back in focus as German Chancellor Angela Merkel meets Greek Prime Minister Antonis Samaras later in the day to review the progress of reforms in Athens. Eurozone finance ministers are set to meet this month to consider the release of the next tranche of Greek bailout funds.

German factory order figures for November will be released later in the day and analysts expect the data to show that conditions in the eurozone's strongest economy remained weak in the month.

"Stronger domestic demand in China should help foster a modest recovery in the coming months although event risk relating to sovereign debt positions and weak demand in the euro area as a whole is expected to see German GDP growth remain below potential this year."

Traders are awaiting the European Central Bank (ECB) and Bank of England (BoE) policy meets scheduled to take place later this week for interest rate decisions. But although the ECB had left the doors open for a rate reduction in the previous month, analysts remain unconvinced that the central bank will resort to any such action for the moment.

In Asia, sentiments weakened as the yen snapped its recent weak run against the dollar. Currency-sensitive Japanese stocks, especially electronics and automobiles, fell in the day, taking the benchmark Nikkei lower from the recent rally that topped multi-month highs.

Australian investor sentiments dampened after official data showed that the country's trade deficit widened the most since early 2008 in November, as imports grew more than exports. But rising demand for iron ore, a key Australian export, has given way to hopes that the trade balance will improve in the coming months.